Annuity Factor Method

AAA

DEFINITION of 'Annuity Factor Method'

A calculation method to determine the amount of eligible withdrawals that an investor can make from their IRA without incurring penalties. The calculation uses life-expectancy data; however, it utilizes different data than is used in the amortization method.

Using the annuity factor method, a retirement-account holder would divide the current IRA account balance by an "annuity factor." The annuity factor is calculated based on average mortality rates (using the mortality table in Appendix B of IRS Revenue Ruling 2002-62) and "reasonable" interest rates – up to 120% of the Mid-Term Applicable Federal Rate.

INVESTOPEDIA EXPLAINS 'Annuity Factor Method'

Using the annuity factor method, an investor can ensure that he or she does not lose account value to potentially costly penalties. It can also help an account holder determine how much money he or she may need to raise through other means (such as by securing a loan) in addition to withdrawing money from their retirement savings account to meet their current financial needs.

Withdrawing money from a retirement plan should be a careful decision as it gives the account holder less time to recoup value and earn interest on plan assets.

RELATED TERMS
  1. Annuitization Method

    A type of annuity distribution structure that gives the annuitant ...
  2. Early Withdrawal

    The removal of funds from a fixed-term investment before the ...
  3. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  4. Withdrawal

    Removing funds from an account, plan, pension or trust. In some ...
  5. Annuity

    A financial product sold by financial institutions that is designed ...
  6. Subaccount Charge

    Fees charged for the management of an investment fund.
Related Articles
  1. Retirement

    Borrowing From Your Retirement Plan

    Left with no alternative but to take money out from your retirement savings? Here are some guidelines.
  2. Taxes

    Tax Treatment Of Roth IRA Distributions

    Learn the requirements for withdrawing funds tax and penalty free.
  3. Retirement

    Tips On How To Use IRAs To Boost Retirement Savings

    According to the Trustees of the Social Security Fund, the fund will be depleted by 2037. Are you ready?
  4. Retirement

    Traditional IRA Deductibility Limits

    Find out where you can take a tax deduction on the contributions you make.
  5. Entrepreneurship

    Business Owners: How To Set Up An SEP IRA

    SEP IRAs are simple to set up and run, making them a popular choice for business owners.
  6. Retirement

    How IRA Contributions Affect Your Taxes

    Learn how to work with the tax man to avoid getting gouged when you convert your plans.
  7. Taxes

    9 Penalty-Free IRA Withdrawals

    If you need to take early distributions, find out which exemptions allow you to avoid expensive consequences.
  8. Personal Finance

    Common IRA Rollover Mistakes

    Avoid paying excess taxes by learning some simple transfer rules.
  9. Taxes

    Avoiding IRS Penalties On Your IRA Assets

    The best way to avoid additional charges and taxes is to know which transactions have expensive consequences.
  10. Taxes

    It's December - Do You Know Where Your IRA Statements Are?

    Don't discard these important documents with your junk mail - they may affect your taxes.

You May Also Like

Hot Definitions
  1. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  2. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  3. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  4. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  5. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  6. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
Trading Center